The €420bn Dutch civil service scheme ABP said its participants had to prepare for significantly higher contributions in the coming years, as pensions provision had become too expensive for the current arrangements.
In its annual report for 2019, it said the current premium of 24.9% was too low given the low interest rates and the expected lower returns.
It also said its board had already decided to gradually reduce the discount rate for the scheme’s future expenses from the current 2.8% to 2% as of 2023.
It added that the social partners of unions and employers would get the opportunity to gear pension arrangements to the new financial reality, and that it would decide on next year’s contribution level in November.
The pension fund voiced its support for the new pensions contract without guarantees – allowing for earlier pension increases in good times, but also for reductions in periods of economic headwind – that is currently being fleshed out in the wake of the pensions accord.
The board said it was not entirely satisfied with last year’s net result of 16.8%, as both equity and alternatives had failed to meet their respective benchmarks, and outperformance had declined over the past years.
It credited the “volatile” investment conditions last year for failing to produce an optimal result.
Underperformance amounted to 0.4 percentage points in total, with equity developed countries (-1.7%) and alternatives (-3.8%) in particular falling short of the norm portfolio.
Private equity, infrastructure, commodities and hedge funds underperformed 6.8, 3.5, 0.9 and 0.7 percentage points, respectively, returning 22.3%, 13.3%, 16.5% and 7.1%, respectively.
ABP noted that overweighting of alternatives had caused its active asset allocation policy to deliver negative results.
Cumulative outperformance over the past five years had been 2.6 percentage points, largely thanks to private equity, credit and equity emerging markets. Cumulative extra returns over the past 10 years amounted to 8.2 percentage points, it said.
In 2019, the civil service scheme had started implementing a three-year strategic investment plan, aimed at an asset mix of 60% securities and 40% fixed income holdings.
It said it was meant to increase the focus on the real economy, including private equity, infrastructure and property, citing “better returns and diversification benefits”, and adding that the asset classes also fitted within its ESG policy.
It added that the new investment approach was also aimed at benefiting from growth in emerging markets.
The pension fund reported that its 25% interest hedge on its liabilities had contributed 1.8% percentage point to its overall result.
In contrast, it had lost 1.4 percentage point on its partial cover of the main currencies. It attributed the result largely to the appreciation of the US dollar relative to the euro.
The civil service scheme reported asset management costs of 57bps, including 24bps for performance fees, and said it spent 9bps on transactions. Administration costs per participant amounted to €68.
It reported that its inflation compensation in arrears had increased to more than 19%.
ABP has 3 million participants and pensioners, affiliated with 3,595 employers. It closed 2019 with total assets of almost €466bn. Its funding level of 95.8% at the time had dropped to 93% at the end of March.